It is about "Trust Me" factor.
- Inherent in the stock value of companies like Berkshire Hathaway Inc.
- Such investment vehicles do not have manufacturing or retail operations and this is why they are able to deliver much needed transparency in their financial disclosures to the investors.
- Because of such business nature, they have minimal accruals and accrual based earnings. As we know, the lesser the accrual based earnings and the higher the cash earnings are, the greater the quality of earnings is. In other language, when the accrual component contributes the least in total earnings, we get the earnings of the greatest quality.
- Forecast of greater quality of company's earnings will always have positive correlation with stock price or its valuation and this is the reason why we cannot consider this factor as trivial.
Should some PhD in multi-factor analysis or in quantitative methods can substantiate a theory on this factor, then is it likely to be employed by portfolio managers in their multi-factor models? In such models, sensitivity to this theoretical factor should be higher for portfolio composed of securities from companies like Berkshire Hathaway like the same way in macroeconomic model where sensitivity to recession factor is higher for Ford Motors and lower for Walmart.